To benefit from limited pipeline in Core CBD sub-market
We expect CCT to benefit from an improving Grade A office market in FY14 as rental levels reach a turning point in an environment of resilient absorption (9M13: 671k sq ft) and limited supply pipeline, with only CapitaGreen (~700k sq ft NLA) coming online in FY14 in the Core CBD sub-segment. After CapitaGreen, the next large set of Core CBD office supply in the pipeline will only come in 2016 with Marina One by M+S Ltd (1,880k sq ft), 5 Shenton Way by UIC Land (290k sq ft) and the redevelopment of International Factors Building and Robinson Towers by Tuan Sing (215k sq ft).

Grade A office rentals likely to recover ahead
Looking ahead to 2014, we are keeping our optimistic stance on the Grade A office rental market. The subsector has weathered through a cycle of changing fortunes over the past few years, with office rentals in a downturn since 3Q11. However, we note that the rate of decline has moderated over the past few quarters, and 3Q13 Grade A office rents are now flat QoQ at S$9.55 psf pm respectively. In addition, the Grade A office space continues to see steady net absorption of 235k sq ft in 3Q13.

Firm operational traction
Over 3Q13, CCT’s overall portfolio occupancy edged up QoQ to 97.6% from 95.8% with ~347k sq ft of space being renewed or signed under new leases. In particular, we note that leasing activity was fairly positive at OGS as the group managed to backfill the bulk of the 9.4% in NLA vacated over 2H13 to maintain the asset’s occupancy level at 94.2%. Due to continued positive reversions, average committed office portfolio rentals also increased QoQ to S$8.03psf from S$7.96psf. AEIs at 6BR and Raffles City remains on track to complete in 4Q13 and 2Q14, respectively, and we expect CCT to begin its S$40m AEI in Capital Tower in 4Q13. Maintain BUY with an unchanged fair value estimate of S$1.61.

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